City of Vancouver Addicted To Debt

07/18/2014 11:38 EDT
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Updated
09/17/2014 05:59 EDT

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"When a person is addicted to a substance...they are not able to control the use of that substance. They continue taking it, even though it may cause harm." That's a key sign of addiction, according to a popular medical website.

In the City of Vancouver's case, the substance is government debt and the city has been addicted for more than a decade. Despite clear signs of an addiction problem, city hall recently proposed an ambitious infrastructure plan that would further increase debt over the next four years.

It's ultimately up to voters to approve the new infrastructure plan in November's election but they should consider the city's finances before making up their minds.

Some background: The City of Vancouver is the only municipality in B.C. that can directly take on debt without permission from the provincial and regional governments. Perhaps not surprisingly, it is also the only municipality in the Metro region with liabilities (debt, employee pension obligations, etc) consistently greater than financial assets (cash, investments, etc).

Being in the reverse position, where financial assets are greater than liabilities, allows a city to more readily cover its liabilities if ever needed.

In 2012, the latest year of comparable data, Vancouver was in the red with liabilities exceeding financial assets by $268 million. In other words, the city was in a net liabilities position. Meanwhile, other Metro municipalities, including nearby Surrey and Burnaby, were collectively $2 billion in the black.

Remarkably, Vancouver's net liabilities quadrupled between 2006 and 2011, from $101 million to $419 million. To the city's credit, net liabilities decreased in 2012 and 2013, although the reduction stemmed from an increase in financial assets, not a reduction in gross liabilities.

In fact, the city's gross liabilities reached a record high of $1.8 billion in 2013, more than double the amount in 2002 ($857 million).

Gross liabilities were on an upward trend from 2002 to 2008, but they really took off in 2009 when the city borrowed $630 million to bail out the floundering Olympic Village project. While the city has been paying off that debt, total debt fell only slightly and overall liabilities have actually increased since.

And now, with gross liabilities at a record high, city hall is proposing to spend $1.1 billion over four years on infrastructure. The plan, which includes new spending on bike lanes and social housing, would be partly funded by adding $400 million to the city's existing debt. So instead of reducing liabilities, the city plans to take on even more debt.

But accumulating debt has consequences. The money eventually has to be paid back and regular Vancouverites will foot the bill through increased taxes and municipal fees. According to estimates by the city's finance staff, the cost of servicing new debt for the proposed infrastructure plan is the equivalent of a 2.2 per cent property tax hike over four years.

It's important to remember that the city, like the rest of us, has to pay interest on debt in addition to repaying the principal. With more money going to service past debt (interest plus principal), less is available for important municipal services such as garbage collection and policing. That means Vancouverites also "pay" for debt indirectly through reduced services.

Importantly, debt servicing costs are set to grow even if the new infrastructure plan fails to move forward. In 2010, debt servicing costs equaled 7.2 per cent of the city's budget. By 2013, they grew to 7.8 per cent and are expected to reach approximately 9 per cent by 2019. In five years, nearly one of every 10 dollars spent by the city on operations will go to servicing debt and not municipal services.

They say the first step on the road to recovery is admitting you have a problem. Unfortunately, with the newly proposed infrastructure plan, the City of Vancouver is signaling it's not ready to kick its debt addiction.